Moneycontrol ResearchAnubhav Sahu
An employee works with cylindrical 6-metre aluminium ingots at the Rusal Sayanogorsk aluminium smelter outside the Siberian town of Sayanogorsk, Russia, March 15, 2017. Picture taken March 15, 2017. REUTERS/Ilya Naymushin - RTX3197L
Himadri Specialty Chemical reported yet another stellar set of numbers for the quarter ended March, benefiting from better product realisations.
A bright outlook on volumes for the next three years, across product lines, and a sustained effort towards increasing the share of higher-margin variants of products (specialty carbon black, anode material for lithium ion battery) in overall sales, are some of the key positives we could draw from the post-results conference call.
Despite the company's volumes growing just 6 percent, its sales for the quarter ended March were up 47 percent year on year, primarily because of higher pricing of products.
While the cost of raw material increased 43 percent over the same period last year, earnings before interest, tax, depreciation and amortisation/tonne rose by as much as 65 percent because of higher pricing of carbon black and coal tar pitch. However, on a sequential basis, EBITDA per tonne remained largely unchanged.
The company's EBITDA margin expanded 520 basis points on year, because of healthy operating leverage. This means its incremental sales came primarily from high-margin products and the variable costs associated with them were low. On a quarter-on-quarter basis, however, EBITDA margin fell 213 bps.
Moderately higher depreciation and an increase in other income helped the company report an annual growth of 134 percent in its net profit for the quarter under review.
Capacity expansion projects
Himadri Specialty Chemical is on course to set up 20,000 tonne of capacity for advance carbon material (ACM) in West Bengal, to be used for lithium ion batteries. This capacity will be commissioned and ready to produce by the end of FY20.
Currently, the company is working with only 50 tonne a month of capacity for ACM and, therefore, is expected to deliver only 600 tonne in FY19. However, after the new capacity is commissioned in FY20, the company is expected to produce and sell 5,000 tonne of ACM a year.
In the case of carbon black, 60,000 tonne of additional capacity (currently 1.2 lakh tonne) for specialty carbon black, which has non-rubber applications, will become available by the June quarter in FY20. The company is expected to start utlising 70-75 percent of the newly-commissioned capacity from the first year itself.
Currently, 8 percent of the company's carbon black volume is accounted for by specialty carbon black, the sale of which is twice as profitable as that of commodity carbon black.
Both the above-mentioned projects would cost Rs 600 crore, which the company will fund from its own coffers.
The company is optimally utlising its production capacities for both carbon black and coal tar pitch at the moment. The growth in its top line is expected to come from contract renewals and expansion of capacity across all majors product classes.
Also, capacity for coal tar pitch (around 6 percent of total volume) would be available in the December quarter of FY19. Similarly, the capacity utlisation for sulfonated naphthalene formaldehyde is expected to improve to 70-75 percent in FY19, from 60 percent in FY18, after the imposition of anti-dumping duty.
In FY20, newly-commissioned capacity for specialty carbon black of around 60,000 tonne and additional capacity for ACM of around 20,000 tonne, is seen driving volume growth.
Source: Company, Moneycontrol Research
The company's earnings, seen growing at a CAGR of 36 percent between FY18 and FY20, are expected to be backed by volume growth and diversification to higher-margin products. After its recent correction, the stock is currently trading at 16 times the company's estimated earnings for FY19 and presents at opportunity to investors who can accumulate it steadily.For more research articles, visit our Moneycontrol Research page